Small and emerging contractors who don’t have the credit to qualify for a standard surety bond can get help through the SBA surety bond. By guaranteeing claims, the SBA entices sureties to bond small businesses that might not otherwise have a chance.
The SBA guarantees contract surety bonds like bid bonds and performance bonds on local, state, or federal projects, up to $6.5 million for non-federal or $10 million for federal contracts.
Increased Access to Contracting Opportunities
Bonding issues can significantly hinder contracting opportunities for many small businesses. The SBA’s surety bonds help remove that barrier and allow small businesses to bid on government projects that they would otherwise not be able to secure.
The SBA guarantees bid, performance, and payment bonds for contracts of $6.5 million or less (including ancillary bonds incidental to the contract) for small and emerging contractors needing more financial strength to secure these bonds through regular commercial channels. The program covers construction, service, and supply contracts.
SBA bond premiums are charged directly to the applicant by their selected bond provider and can vary significantly per application. They are typically higher than standard contract bond premiums. However, the added value to a company’s bidding ability is often worth the extra charge.
Increased Access to Credit
Many small businesses need help to meet the standard bonding requirements of a contract. The SBG Program allows specific surety bond companies to grant contract bonds to contractors – allowing them to bid on projects they might not otherwise have been able to.
This is especially helpful for new contractors or recently transferred ownership. Often, these companies have negatively Analyzed Net Worth, which could be more conducive to obtaining contract bonds in the standard market.
However, the SBA program allows these companies to underwrite contracts using different methods and more discretion – removing what can be a significant barrier for some small businesses. The size and scope of the project still affect the contract bond premiums, though.
Increased Access to Working Capital
The SBA is helping remove one of the most significant barriers to contracting for some small businesses. This is through their ability to guarantee bonds and their more lenient underwriting requirements geared towards the contractor’s growth.
The streamlined application process allows contractors to gain access to bonding capacity that they might not have otherwise received through regular commercial channels. This is typically at an additional cost to the contractor but is well worth the additional opportunity for increased profits and capacity.
The scheme also allows smaller contractors to receive contract bonding when their Principal has a criminal record that disqualifies them from being eligible for standard bonding.
Increased Access to Market Research
The SBA Surety Bond Guarantee Program is an excellent option for contractors with credit problems going through a buyout or those with little to no working capital. The program allows contract bond companies to write bonds based on the contractor’s “Analyzed Net Worth” (current assets minus current liabilities) with some restrictions, including excluding certain intangible assets and assets from related parties that are unlikely to be collected.
Traditionally, these bonds cost more than standard ones. Still, the additional cost seems worth it when the alternative cannot participate in federal, state, and local contracts. The program facilitated over $2 billion in contract awards last year alone.
Increased Access to Suppliers
SBA’s program partners with surety companies, allowing them to offer bonding services for small businesses that lack the experience and financial strength to secure these bonds through regular commercial channels. These relationships benefit sureties and small business producers beyond the simple exchange of funds.
Historically, SBA-authorized bond agents, surety partners, and small businesses manually entered Work in Process (WIP) data into SBA’s Capital Access System. This required 30 minutes or more to complete a single report.
The proposed streamlined requirement removes the CO’s statement that a guarantee is necessary, which SBA believes creates the appearance of partiality. Instead, the oath would require that the CO certify that the surety company is not denying coverage based on the business’s financial condition.
